The Bipartisan Banking Bill would provide banking organizations with relief from their stress testing, capital and liquidity requirements by adjusting the thresholds, frequency and substance of these rules.  The bill – which recently passed in the Senate, as described in a recent post here – is now being considered in the House, where Rep. Jeb Hensarling (R-TX) and other representatives have said they plan to propose a series of amendments.

This post summarizes how the Bipartisan Banking Bill would change the U.S. banking agencies’ stress testing, capital and liquidity rules – including by adding a new and unusual statutory override of the U.S. banking agencies’ Basel III capital rules for higher-risk commercial real estate exposures that was not included in earlier versions of the bill.

We have also published a visual memorandum here that goes into more detail on these and other elements of the bill.

Changes Surviving from Earlier Drafts of the Bill

As passed by the Senate, the Bipartisan Banking Bill preserves most of the changes that earlier versions of the bill would have made to the stress testing, capital and liquidity rules – as discussed in our previous posts here, here and here.  These changes include the following:

• Supplementary Leverage Ratio (SLR) for Custody Banks. The bill would direct the U.S. banking agencies to exclude certain central bank deposits from the total leverage exposure (the SLR denominator) of a custody bank—defined as a “depository institution holding company predominantly engaged in custody, safekeeping and asset servicing activities,” together with its insured depository institution subsidiaries.  Central bank reserves of a custody bank would be excluded only to the extent of the value of client deposits at the custody bank that are linked to fiduciary, custody or safekeeping accounts.
  • The bill does not specifically define “predominantly engaged.”
  • The bill specifically includes a rule of construction that nothing in this provision would limit the U.S. banking agencies’ authority to tailor or adjust the SLR or any other leverage ratio for any bank that is not a custody bank.
• Treatment of Municipal Securities under the Liquidity Coverage Ratio (LCR). The U.S. banking agencies would be required to consider certain investment grade municipal securities as Level 2B high quality liquid assets for purposes of the LCR.  These proposed changes to the LCR are consistent with H.R. 1624, which passed the House on October 3, as discussed in an earlier post here.
• Thresholds and Frequency of Dodd-Frank Act Company-Run Stress Tests. The statutory thresholds for Dodd-Frank Act company-run stress tests for BHCs would increase to $250 billion from their current levels—more than $10 billion for annual company-run stress tests and $50 billion or more for mid-year company-run stress tests.  In addition, the bill would eliminate the statutory requirement that company-run stress tests be conducted at an annual or semi-annual frequency, depending on the size of the company—adopting instead a more flexible standard of “periodic” stress tests.
• Thresholds and Frequency of Dodd-Frank Act Supervisory Stress Tests. For BHCs with total consolidated assets of $100 billion or more and less than $250 billion, the Federal Reserve would be required to conduct “periodic,” rather than annual, supervisory stress tests.  We note that this requirement is in Section 401(e) of the Bipartisan Senate Bill and does not also appear in the part of the bill that would amend the Dodd-Frank Act.
• Number of Dodd-Frank Act Stress Test Economic Scenarios. The bill would also reduce the required number of economic scenarios from three to two, eliminating the middle-of-the-road adverse scenario from the Dodd-Frank Act stress testing framework and leaving the baseline and severely adverse scenarios.
• Impact on CCAR? While the changes above technically apply to the Dodd-Frank Act stress testing requirements rather than the Federal Reserve’s CCAR capital planning framework, it is difficult to imagine the Federal Reserve taking a different approach in terms of making corresponding changes to its capital planning regulations.
• Community Bank Leverage Ratio. The U.S. banking agencies would be directed to establish via rulemaking a community bank leverage ratio—of tangible equity capital to average total consolidated assets—for qualified depository institutions and depository institution holding companies with total consolidated assets of less than $10 billion.  An institution or holding company exceeding the community bank leverage ratio—the calibration of which the bill specifies as being not less than 8% and not more than 10%—would be deemed to meet its otherwise applicable capital requirements, including the leverage ratio and risk-based capital requirements, and, in the case of an insured depository institution, the ratios required to be considered well-capitalized for prompt corrective action purposes.
  • The bill would also require the U.S. banking agencies (1) to consult with the relevant state banking supervisors in implementing the community bank leverage ratio and (2) to notify the relevant state banking supervisor of any qualifying community bank with respect to its compliance with the community bank leverage ratio.

New Provision on the Capital Treatment of Commercial Real Estate Exposures

The Bipartisan Banking Bill includes a new change relating to the capital treatment of high volatility commercial real estate (HVCRE) exposures, which was not included in earlier versions of the bill.

Currently, the U.S. Basel III capital rules define a category of HVCRE exposures that are subject to a heightened, 150% risk weight for purposes of calculating a banking organization’s risk-based capital requirements.  The Bipartisan Banking Bill would define a new category of HVCRE ADC loans and would amend the Federal Deposit Insurance Act to prevent the U.S. banking agencies from applying heightened risk weights to an HVCRE exposure unless the exposure also falls within the definition of an HVCRE ADC loan – effectively creating a specific statutory capital regulation requiring the U.S. banking agencies to align their rules with this definition.

The following table summarizes the definition of an HVCRE exposure under the current U.S. Basel III capital rules, the definition of an HVCRE ADC loan under the Bipartisan Banking Bill, and our initial analysis as to the significant differences between the two definitions:

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